The California Supreme Court has held that an insurer can file a claim directly against Cumis counsel under an unjust enrichment theory to recover for alleged overpayments due to unreasonable and unjustifiable fees charged in connection with underlying litigation. Hartford Cas. Ins. Co. v. J.R. Marketing, LLC, No. S211645 (Cal. Aug. 10, 2015).
This case arose from a determination that an insurer breached its duty to defend an insured in connection with underlying litigation. As part of that ruling, the trial court ordered the insurer to defend its insured and to immediately pay all past fees for independent counsel as well as all future fees within 30 days of receipt. The trial court further held that, because the insurer originally breached its duty to defend, it was not entitled to invoke the protections afforded under the Cumis statute, California Civil Code Section 2860, which provides that disputes concerning fees of independent counsel must be submitted to binding arbitration by the parties. Finally, the trial court’s order provided that “[t]o the extent [the insurer] seeks to challenge fees and costs as unreasonable or unnecessary, it may do so by way of reimbursement after resolution of” one of the underlying lawsuits. The order was affirmed on appeal.
After the underlying litigation concluded, and after independent counsel had charged more than $15 million in fees, the insurer sought reimbursement of excessive fees from its insured. The insurer also brought a cross-complaint in the declaratory judgment action, which was still ongoing, directly against the independent counsel for reimbursement of purportedly excessive and unreasonable fees. In so doing, the insurer asserted a common-law, quasi-contractual right to reimbursement under Buss v. Superior Court, 939 P.2d 766 (Cal. 1997). The trial court sustained a demurrer to the insurer’s cross-complaint, holding that it could not sue the counsel directly. The California intermediate appellate court affirmed.
On appeal, the California Supreme Court reversed, holding that “under the circumstances of this case, the insurer may seek reimbursement directly from Cumis counsel.” Applying the facts of this case to the precedent under Buss, the court observed that this case was distinguishable from Buss because the insurer here alleged that the counsel was unjustly enriched because it charged and was paid amounts that were unreasonable and unnecessary for the defense of the claim—and, therefore, that the costs and fees were not incurred for the benefit of the insured. As such—under the assumption that the insured was not “enriched”—the court ruled that it was the law firm that could be liable under an unjust enrichment theory under “principles of restitution and unjust enrichment” if it could be shown, by the insurer, that the bills were objectively unreasonable. In its ruling, however, the court “express[ed] no view as to what rights an insurer that breaches its defense obligations might have to seek reimbursement directly from Cumis counsel in situations other that the rather unusual ones … in this case.”